Financial regulators

Finance's other bosses

Banks are reshuffling their leaders. Time for their supervisors to get their act together, too

THE identity of the people who run the world's banks is not just a matter for boards and shareholders. The credit crisis has shown that society has a stake in how well finance is run. So it is right that the comings and goings of bank bosses attract lots of attention. That process can look pretty messy—witness the botched succession process at HSBC and the bloodletting at UniCredit. Until, that is, you compare it with finance's other big personnel issue: who runs the regulators.

In America the Federal Reserve, whose responsibility for financial stability has expanded thanks to the Dodd-Frank reform act, is currently short of its full complement of governors pending confirmation hearings in the Senate. The Office of the Comptroller of the Currency, a bank regulator, has been without a proper head since mid-August. Republican opposition to Elizabeth Warren, a law professor who has been a vocal critic of the banks, has stymied her chances of heading America's new Consumer Financial Protection Bureau; to avoid a confirmation battle she has been named an adviser on the agency's launch. There is no word on who will head the Office of Financial Research, a new body which will help monitor systemic risks. The hiring process for the head of the new Federal Insurance Office has only just kicked off.

It is a similar story in Europe, where policymakers have just agreed on the creation of three beefed-up supranational bodies to look after banks, markets and insurers respectively. Those institutions will begin operating at the start of next year, which will be here in no time, but no one has any idea who will lead them and few expect announcements in time for their launch. It is not clear whether their staff will be recruited directly or seconded from national regulators. And whenever international appointments are made, the risk of a geographical version of Buggins's turn also looms. Just look at the politicised efforts to find a new head for the IASB, an international accounting standard-setter (see article). Or the absurd number of people—61 of them—who will sit on the new European Systemic Risk Board.

Hurry up, get a backbone

Does it really matter who is in charge of the regulators? The grunt work of supervision depends on more junior staff, who will always struggle to keep tabs on smarter, better-paid types in the firms they regulate. There is a natural tendency for regulators to get captured by their charges. Some of the new institutions will be less important than others—Europe's new banking watchdog will have less to do than the markets supervisor, for instance. Tighter regulation in one bit of finance may push excessive risk-taking into unregulated areas. And when crisis hits, decision-making shifts to a tiny handful of people at treasuries and central banks who can spend or create money.

Putting too much faith in the regulators would indeed be a mistake. But regulators with spine are still better than invertebrates. Imagine the difference it might have made to Ireland and Iceland, say, if supervisors there had resisted banks' eye-watering credit growth. The likes of Adair Turner or Sheila Bair, heads of Britain's Financial Services Authority and America's Federal Deposit Insurance Corporation respectively, at least say what they think.

Damaging uncertainty about the scope of new agencies cannot begin to dissipate until people are appointed to run them. America's Financial Stability Oversight Council, whose first meeting was due to be held this week, has some very basic questions to answer about what constitutes a systemically important firm, for example. Legitimacy matters, too. The shift towards a more pre-emptive form of regulation, in which a build-up of systemic risk is addressed before trouble hits, will probably mean telling borrowers that credit has been turned off for their own good. If that is to work (and there are big questions about whether it can), there has to be a proper sense of public accountability.

All of which argues for speed and transparency in openness. The Obama administration has been slow to nominate candidates: it should hurry up. And although America is not a great advertisement for the confirmation process, the principle of pre-appointment hearings is a good one. There is plenty of public debate about who should run banks. The choice of their guardians should receive just as much attention.